Islamic finance is sharia compliant way of financing. Sharia, on one hand, prohibits any transaction
involving undue uncertainty and on the other hand, it requires avoidance of
receiving interest. Sharia defines interest as any income derived in excess of loan.
Loans involve personal guarantee of debtor and therefore any such benefit would
amount to injustice to debtor. In other words, you can only make profit when
you don’t enjoy guaranteed return of the principal amount.
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| Islamic finance is Sharia compliant way of raising funds |
Another important aspect of sharia financing is use of money
for ethically healthy projects e.g. you cannot invest in projects involving alcohol
manufacturing.
Sharia compliant financial institutions have developed many
sharia compliant products including modaraba, musharika, sukkuk, murabaha etc. Let’s
discuss them one by one
Modaraba
Modaraba is financing mode in which one person provides financial
resources and other labour and skills to carry out business. Both share profit,
in pre-determined ratio, while losses would accrue to one who invested
financial resources.
Musharaka
Musharka is mode of financing in which both partners
contribute capital and divide profits/losses according to pre-agreed ratio.
Sukkuk
Sukkuk is a bond which
gives right of ownership, of some tangible asset, to its holders. The holder of
instrument then collects profit as rent of the asset. Three elements of sukkuk as outlined by Taqi
Usmani are
·
Sukuk must represent ownership shares in assets or commercial or
industrial enterprises that bring profits or revenues
·
Payments to Sukuk-holders should be the share of profits (after
costs) of the assets or enterprise
·
The value payable to the Sukuk-holder on maturity should be the
current market value of the assets or enterprise and not the principal
originally invested,
Murabaha
Murabaha is sharia compliant form of leasing. In this form
no amount is charged for late payment as it would constitute interest (Riba).
Murabaha has become the most prevalent form of Islamic financing.
